Mobile:  (850)-259-1625 Office: (850) 837-1880 Toll Free: (800) 480-3949 E-Mail: Andrea Farrell

1031 Tax Free Exchange

The facts: IRS Section1031 Tax Deferred Real Estate Exchanges

Section 1031 of the Internal Revenue Code allows a tax payer to defer/postpone the payment of capitol gains tax from the sale of investment real estate if the proceeds are re-invested into "like-kind" property. You must have held the relinquished property and you must hold the replacement property for investment or for productive use in a trade or business.

LIKE-KIND EXCHANGES

Like-kind exchanges refers to the type of property being exchanged. You can exchange any real estate investment property for any other type of real estate investment property (i.e.,vacant lot for a rental condominium). Your primary residence or second home does not qualify as a like-kind investment property.

EXCHANGING UP RULE

To accomplish a fully tax-deferred exchange, the rule to follow is to exchange even or up in value and exchange even or up in equity.

BOOT

To the extent that the taxpayer receives money or other property (i.e. boat or car) as part of payment, he will have recognized gain, commonly called "boot." To the extent that you do not purchase property of equal or greater value, you will have received non-qualifying property ("boot") in your exchange . If boot is received, tax is computed on the amount of gain on the sale or the amount or boot received-- whichever is less.

DEFERRED EXCHANGES

While real estate exchanges offer excellent tax advantages, they must be structured in accordance with ALL I.R.S. Regulations to realize a tax deferment benefit. In 1991, the I.R.S. issued final regulations on how to successfully complete a tax deferred exchange. The regulations impose limitations on real estate exchanges and provide guidance in this area of tax law.

TIME CONSTRAINTS

In a deferred exchange you are required to "identify and designate" your new property within 45 days from the transfer of the property sold. This must be completed in writing and received by your facilitator within 45 days. Additionally, you must close one or more of the identified replacement properties within 180 days of the closing of the property you have sold; or before the due date for filing your tax return for the year in which the property which you sold closed - whichever is sooner. NO EXTENSIONS ARE GIVEN TO THE 45 AND 180 DAY TIME RESTRICTIONS.

IDENTIFICATION

In adherence to the I.R.S. regulations, you must identify replacement property in writing to your facilitator no later than the 45th day. You can identify up to 3 properties regardless of their value. Should you identify more than 3 properties, the total value of all the properties cannot exceed 200% of your sold property's value. It is also required that the properties be located in the United States.

If you have further questions, please contact your attorney or accountant.